Inequality in the EU

Among the many challenges facing the EU is inequality. There are numerous forms of this. Policymakers have often given attention to particular in issues such as youth unemployment, which is in general much greater than unemployment as a whole within the EU, and particularly severe in many of the southern EU countries. Inequality with respect to women and minorities has equally been a policy focus.

However, there is a broader issue that is more fundamental. This is the inequality between the member states themselves, for this is the issue that can exacerbate tensions among them. This is particularly so for the new EU member states, and most notably the 10 states that joined in 2004. Yes, they have made progress since then, and been able to take advantage of many aspects of the EU, such as regional funding, infrastructure development, the common agricultural policy, the single market, and so on. Their incomes have risen and their quality of life has improved. But this is also true for the older members. The eastern European countries in particular are a long way from the standard of living in the west: the quality of public services is lower, the infrastructure is poorer, the life expectancy is lower and crime rates and corruption are higher.These disparities, if neglected, will give rise to significant problems for the EU.

Inequality in the EU: the data
Income distribution gives some idea of inequality in a society. Income as an indicator can also be a proxy for many other variables, so it can suggest to some extent how other variables, such as education, health, and life expectancy are distributed. The graph below shows how income in the EU has been distributed over the years 2005-2017, i.e. in the years since the big enlargement of 2004. (In all years, it is the distribution in today’s EU, with 28 member states, that is calculated.) It can be seen that there has been little change. The top 1 per cent still draw about 10 per cent of the total income. The shares of the lower groups have hardly changed either. The change from candidate country to member state has not really affected the relative positions of the different income groups in the EU population.


Data from World Inequality Database

Eurostat publishes an interesting statistic in the area of income inequality, the so-called quintile percentage ratio. This is the ratio between the income of the top 20 per cent of the population and the income of the bottom 20 per cent. The higher this ratio the more inequality. If everyone had the same income the figure would be 1. For the EU28 the figure was 4.9 in 2010. It rose to 5.0 from 2011 to 2013, then to 5.2 from 2014 to 2016, falling back to 5.1 in 2017.
At the level of individual member states, there are notable differences. In general, countries that were above the average in 2009 were still above the average in 2017, while those below the average in 2009 were still below in 2017. The countries with low ratios at the beginning of the period tend to be still in the same group at the end of the period. Slovenia, Czechia, Finland, the Netherlands and Slovakia are in this group. At the other end, Romania, Bulgaria, and Lithuania maintain very high values for the ratio, with Bulgaria’s value of 8.2 in 2016 being the highest of all countries over the whole period.
However, it’s possible to have a low value and still improve. Latvia, Poland and Croatia are examples of this as is Portugal. Latvia had a ratio of 7.4 at the beginning of the period and had reduced it to 6.3 by the end of the period. Another category is of countries that had an acceptable value for the ratio at the beginning of the period and still managed to improve on it, i.e. to have had a lower value of the ratio in 2017. These included Czechia, Slovakia, Finland, and Belgium. Most notable, however, is Denmark, which had a value of 4.6 in 2009 and achieved a lowering of the rate to 4.1 in 2017.

The countries of Eastern Europe are a special case because they have in recent years been subject to significant demographic change caused principally by migration. This has several impacts. In some cases, in Hungary, in particular, in migration has encouraged or enabled xenophobic tendencies. This is particularly exacerbated by a tradition of homogeneity: as Ivan Krastev has pointed out, until the fall of Communism, most Eastern European countries were unfamiliar with in-migration, and Hungary was ethnically almost completely homogenous. Outmigration has also been very important in recent years, for these countries. This means that populations are being skewed towards the elderly, and that there are labour shortages within the country. Of course, there are increased remittances to the affected countries from abroad, either from the earnings of those who have emigrated or from social security payments, (family allowances and the like) that are paid at the higher rates of the destination member states. But these financial transfers cannot compensate for the weaknesses in the economic systems caused by out-migration. Labour shortages have their price effects, but also usually equate to skills shortages, hampering any growth potential. Social cohesion is also undermined, and the weakened public administration means more corruption. There is also a downward spiral, because inadequacies in the public administration will distort the statistics and more generally, influence policies that affect income and its distribution.

Wealth inequality
Ask most people would they rather have high income or high wealth and the answer will probably be wealth (more power, sustained power, less risk, less effort?). Leaving aside all the questions of wealthy families giving their children a head start in the race for high income, the high earner will have an eye on wealth as the goal, and the low earner will feel that wealth can never be a goal for him. In talking about income inequality, therefore, wealth inequality is also worth looking at. World Bank data gives estimates for many countries, and the EU countries are covered for the years between 2009 and 2015, with a couple of gaps. The data gives Gini coefficients, which measure the actual distribution compared to an absolutely equitable one.
In general, wealth inequality has increased in the majority of the countries over this period, but not enormously. More countries dis-improved rather than improved their position in 2015 compared to 2009. The best performer Slovenia has maintained its position, as the EU country with the lowest wealth inequality, in each of the years 2009 to 2015. In most of those years, including 2015, Lithuania is the one with most wealth inequality. It is interesting that there are no obvious geographical or political patterns. The six founding members of the EU vary widely in wealth distribution, and the ten Eastern European countries who joined at the same time in 2004 are found all over the ranking, and they include the top three performers. In the period covered by the data, the most improved country is Poland and the most dis-improved country is Hungary.

Wealth inequality in the EU countries 2015

Rank Gini Wealth Coefficient 2015Rank Gini Wealth Coefficient 2015
Source: World Bank
*Bulgaria figure is for 2014

Inequality and the member states
In the above, we’ve looked at income inequality in the EU as a whole. We’ve also looked at how income inequality varies within individual EU member states. But there’s another way of looking at it that relates to the way that people see themselves within Europe, as citizens of a particular member state and also to some extent as EU citizens. Tension between these two concepts arises when income is considered. If the EU is a democratic coming together of individual nations states who are pooling their strengths to overcome their difficulties, should there be big disparities in income between those member states? If you are from a low-income EU country, won’t you perhaps feel that the richer EU countries should make more of a contribution to your well-being? If you’re from a high-income EU country, won’t you feel under unwelcome pressure to sacrifice some of your own well-being to alleviate the problems of the low-income countries, even if these problems (as it seems to you) are not of your making?

This is not quite the same debate as the global debate about development assistance. There the developed countries have agreed to make a certain contribution, expressed as a percentage of their GDP, even if they don’t necessarily manage to do so. The developing countries have little leverage to influence this. But in the EU, the size of the budget and the distribution of the spending are political decisions taken jointly. While in practice the voices of the economically weaker member states are also weaker, there are other forces at work also. There is a general commitment to solidarity. There are shared objectives and outlines of what the shared future will be. There is a complex of treaties and legislation that largely determines economic and financial governance. Moreover, the countries are geographically linked and have free movement of peoples. Contrast that with the developed and developing countries at a global level: the problems of the latter may appear to the former as less immediate, less urgent, and less far-reaching.

EU data shows that there is some progress in reducing income inequality between the member states. Taking GDP per capita in PPS, which adjusts the figures for differences in purchasing power, Eurostat publishes an index, with the EU28 at 100, allowing comparison of countries as to what extent they are above or below the average GDP per capita in real terms. In 2006 the highest level was in Luxembourg, at 261, and the lowest was in Bulgaria at 37. Thus the level in the highest-income country was more than seven times that in the lowest-income country. But improvements have taken place over the years since then. In 2017, Luxembourg was still the highest-income country, and Bulgaria still the lowest-income country, but the ratio between the two has fallen: Luxembourg’s GDP per capita is now 5.16 times that of Bulgaria. You might say that Luxembourg is a special case, and that a better comparator is Germany, since it is a large, diversified and successful economy that is a migration destination. In this case, the ratio still shows a fall, from 3.14 to 2.53 over the period 2006 to 2017. Taking a wider view, there has been a reduction, across all countries, in national income disparity. The standard deviation of the GDP per capita index for the EU-28 countries reduced from 44.016 in 2006 to 40.491 in 2017.

It’s important for the future of the EU that inequalities between countries are monitored and addressed, because otherwise existing tensions between northern and southern, eastern and western countries will be exacerbated. There will also be an erosion of the solidarity that underlies the institutions and the will to govern by consensus. In addition, extreme disparities in income between one century and another will have economic consequences also. There will be further migration to the higher-income countries from the lower-income countries. Investment trends will increase the disparities, because lower wages will not be enough to compensate for poorer infrastructure, a weaker technological base, lower educational and skill levels, and an inadequate public administration.